UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549



FORM 10-QSB



QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period ended March 31, 2007



COMMISSION FILE NUMBER     333-69414



SOURCE DIRECT HOLDINGS, INC.

(Exact name of registrant as specified in charter)



|                                         |  |                                  
|---------------------------------------- |  | ---------------------------------
|Nevada                                   |  | 20-0858264                       
|(State of jurisdiction of incorporation) |  | (IRS Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|4323 Commerce Circle, Idaho Falls, Idaho |  | 83401     
|(Address of principal executive offices) |  | (Zip Code)



|                                                   |               
|-------------------------------------------------- | --------------
|Registrant's telephone number, including area code | (877) 529-4114





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x         No  ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.     Yes  ̈         No x



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: As of May 21, 2007, the Company had outstanding 8,191,091 shares of its common stock, no par value.



Transitional Small Business Disclosure Format (check one):     Yes  ̈         No x







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TABLE OF CONTENTS



|                                                                         |      | 
|------------------------------------------------------------------------ | ---- | 
|ITEM NUMBER AND CAPTION                                                  | PAGE
|                                                                         |      | 
|PART I                                                                   |      | 
|                                                                         |      | 
|ITEM 1.     FINANCIAL STATEMENTS                                         | 3   
|ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION    | 8   
|ITEM 3.     CONTROLS AND PROCEDURES                                      | 18  
|                                                                         |      | 
|PART II                                                                  |      | 
|                                                                         |      | 
|ITEM 1.     LEGAL PROCEEDINGS                                            | 18  
|ITEM 2.     UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS | 19  
|ITEM 5.     OTHER INFORMATION                                            | 21  
|ITEM 6.     EXHIBITS                                                     | 21  
|                                                                         |      | 







2





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PART I

ITEM 1. FINANCIAL STATEMENTS



Source Direct Holdings, Inc.

Condensed Consolidated Balance Sheets

March 31, 2007



|                                                                                                               |             |             |           |   |            
|-------------------------------------------------------------------------------------------------------------- | ----------- | ----------- | --------- | - | -----------
|                                                                                                               | 31-Mar-07   |             | 30-Jun-06
|                                                                                                               | (Unaudited) |             | (Audited)
|ASSETS                                                                                                         |             |             |           |   |            
|Current Assets                                                                                                 |             |             |           |   |            
|Cash and cash equivalents                                                                                      | $           | -           |           | $ | -          
|Accounts receivable                                                                                            |             | 30,674      |           |   | 50,829     
|Inventory                                                                                                      |             | 339,075     |           |   | 332,896    
|Prepaid expenses                                                                                               |             | 663,510     |           |   | 640,589    
|Total Current Assets                                                                                           |             | 1,033,259   |           |   | 1,024,314  
|                                                                                                               |             |             |           |   |            
|Property and Equipment                                                                                         |             |             |           |   |            
|Property and equipment                                                                                         |             | 101,048     |           |   | 886,084    
|Less: Accumulated depreciation                                                                                 |             | (38,947)    |           |   | (72,143)   
|Net Property and Equipment                                                                                     |             | 62,101      |           |   | 813,941    
|                                                                                                               |             |             |           |   |            
|Other Assets                                                                                                   |             |             |           |   |            
|Deposits                                                                                                       |             | 208,333     |           |   | -          
|Intangible assets                                                                                              |             | 115,000     |           |   | 115,000    
|Accumulated amortization                                                                                       |             | (25,557)    |           |   | (19,806)   
|Net Other Assets                                                                                               |             | 297,776     |           |   | 95,194     
|                                                                                                               |             |             |           |   |            
|TOTAL ASSETS                                                                                                   | $           | 1,393,136   |           | $ | 1,933,449  
|                                                                                                               |             |             |           |   |            
|LIABILITIES & STOCKHOLDERS' EQUITY                                                                             |             |             |           |   |            
|Current Liabilities                                                                                            |             |             |           |   |            
|Accounts payable                                                                                               | $           | 128,173     |           | $ | 115,170    
|Accrued expenses                                                                                               |             | 89,630      |           |   | 69,178     
|Bank Overdraft                                                                                                 |             | 14,839      |           |   | 16,714     
|Notes payable                                                                                                  |             | 284,222     |           |   | 148,568    
|Total Current Liabilities                                                                                      |             | 516,863     |           |   | 349,630    
|                                                                                                               |             |             |           |   |            
|Long-Term Liabilities                                                                                          |             |             |           |   |            
|Building loan, net of current portion                                                                          |             | -           |           |   | 763,962    
|Total Long-Term Liabilities                                                                                    |             | -           |           |   | 763,962    
|                                                                                                               |             |             |           |   |            
|Total Liabilities                                                                                              |             | 516,863     |           |   | 1,113,592  
|                                                                                                               |             |             |           |   |            
|Stockholders' Equity                                                                                           |             |             |           |   |            
|Common stock -- $.001 par value; 200,000,000 shares
authorized; 8,191,091 issued and outstanding, respectively |             | 8,159       |           |   | 95,458     
|Additional paid-in capital                                                                                     |             | 6,205,931   |           |   | 4,169,918  
|Accumulated deficit                                                                                            |             | (5,337,817) |           |   | (3,445,519)
|Total Stockholders' Equity                                                                                     |             | 876,273     |           |   | 819,857    
|TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                                                       | $           | 1,393,136   |           | $ | 1,933,449  



See accompanying notes to financial statements.



3





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Source Direct Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)



|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|--------------------------------------------- | ------------------------------------ | --------- | ------------------------------------ | - | ----------------------------------- |  | ----------------------------------- | ----------- |  | - | ----------
|                                              | For the Three
Months Ended
31-Mar-07 |           | For the Three
Months Ended
31-Mar-06 |   | For the Nine
Months Ended
31-Mar-07 |  | For the Nine
Months Ended
31-Mar-06
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|Revenues                                      | $                                    | 76,833    |                                      | $ | 137,603                             |  | $                                   | 368,969     |  | $ | 267,581   
|Cost of goods sold                            |                                      | 37,080    |                                      |   | 48,790                              |  |                                     | 164,878     |  |   | 96,359    
|Gross Profit                                  |                                      | 39,753    |                                      |   | 88,813                              |  |                                     | 204,091     |  |   | 171,222   
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|General and administrative expense            |                                      | 258,036   |                                      |   | 182,549                             |  |                                     | 2,264,854   |  |   | 749,151   
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|Income (Loss) from Operations                 |                                      | (218,283) |                                      |   | (93,736)                            |  |                                     | (2,060,763) |  |   | (577,929) 
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|Other Income                                  |                                      | -         |                                      |   |                                     |  |                                     | 175,148     |  |   | -         
|Interest expense                              |                                      | (356)     |                                      |   | (18,387)                            |  |                                     | (6,734)     |  |   | (57,652)  
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|Net Income (Loss)                             | $                                    | (218,639) |                                      | $ | (112,123)                           |  | $                                   | (1,892,349) |  | $ | (635,581) 
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|Net Loss per share                            | $                                    | (0.027)   |                                      | $ | (0.001)                             |  | $                                   | (0.231)     |  | $ | (0.008)   
|                                              |                                      |           |                                      |   |                                     |  |                                     |             |  |   |           
|Weighted Average Number of shares outstanding |                                      | 8,191,091 |                                      |   | 84,543,531                          |  |                                     | 8,191,091   |  |   | 82,404,526





See accompanying notes to financial statements.





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Source Direct Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine-month periods ended March 31, 2007 and 2006

(Unaudited)



|                                                                             |                                     |             |                                     |   |          
|---------------------------------------------------------------------------- | ----------------------------------- | ----------- | ----------------------------------- | - | ---------
|                                                                             | For the Nine
Months Ended
31-Mar-07 |             | For the Nine
Months Ended
31-Mar-06
|Cash Flow Used for Operating Activities                                      |                                     |             |                                     |   |          
|Net Income (Loss)                                                            | $                                   | (1,892,350) |                                     | $ | (112,121)
|Adjustments to Reconcile net loss to
net cash used for operating activities: |                                     |             |                                     |   |          
|Depreciation                                                                 |                                     | 15,288      |                                     |   | 10,529   
|Amortization expense                                                         |                                     | 5,751       |                                     |   | 1,917    
|Stock issued for services                                                    |                                     | -           |                                     |   | 23,678   
|(Increase)/decrease in trade receivables                                     |                                     | 20,155      |                                     |   | (43,663) 
|(Increase)/decrease in inventory                                             |                                     | (6,179)     |                                     |   | (13,171) 
|(Increase)/decrease in deposits                                              |                                     | (208,333)   |                                     |   | -        
|(Increase)/decrease in prepaid expenses                                      |                                     | (22,921)    |                                     |   | (12,544) 
|Increase/(decrease) in accounts payable                                      |                                     | 13,055      |                                     |   | (19,627) 
|Increase/(decrease) in accrued liabilities                                   |                                     | 18,577      |                                     |   | (28,678) 
|Increase/(decrease) in income taxes payable                                  |                                     | -           |                                     |   | -        
|Net Cash Flows Used for Operating Activities                                 |                                     | (2,056,957) |                                     |   | (193,680)
|                                                                             |                                     |             |                                     |   |          
|Cash Flows used for Investing Activities                                     |                                     |             |                                     |   |          
|Sale of Property                                                             |                                     | 751,516     |                                     |   | -        
|Purchase equipment                                                           |                                     | (14,965)    |                                     |   | -        
|Net Cash Flows Used for Investing Activities                                 |                                     | 736,551     |                                     |   | -        
|                                                                             |                                     |             |                                     |   |          
|Cash Flows used for Financing Activities                                     |                                     |             |                                     |   |          
|Proceeds from shareholder loans                                              |                                     | -           |                                     |   | 75,600   
|Payments on shareholder loans                                                |                                     | -           |                                     |   | (600)    
|Net borrowing (payments) on long-term debt                                   |                                     | (763,962)   |                                     |   | (862)    
|Increase (decrease) in note payable                                          |                                     | 135,654     |                                     |   | -        
|Proceeds from stock issuance                                                 |                                     | 1,948,714   |                                     |   | 113,000  
|Net Cash Flows Used for Financing Activities                                 |                                     | 1,320,406   |                                     |   | 187,138  
|                                                                             |                                     |             |                                     |   |          
|Net Increase / (Decrease in cash                                             |                                     | -           |                                     |   | (6,542)  
|Beginning Cash Balance                                                       |                                     | -           |                                     |   | 9,274    
|                                                                             |                                     |             |                                     |   |          
|Ending Cash Balance                                                          | $                                   | -           |                                     | $ | 2,732    
|                                                                             |                                     |             |                                     |   |          
|Supplemental Disclosures                                                     |                                     |             |                                     |   |          
|Interest paid                                                                | $                                   | 190         |                                     | $ | 18,386   
|Income taxes paid                                                            | $                                   | -           |                                     | $ | -        
|Shares and share equivalents issued for expenses                             | $                                   | -           |                                     | $ | 416,210  





See accompanying notes to financial statements.









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Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2007

(Unaudited)



Note 1

ORGANIZATION AND INTERIM FINANCIAL STATEMENTS



Interim financial statements- The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles for complete financial statements generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2007. There has not been any change in the significant accounting policies of Source Direct Holdings, Inc., for the periods presented. The results of operations for the three and nine month periods ended March 31, 2007, are not necessarily indicative of the results for a full-year period.  It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006, filed with the Securities and Exchange Commission (the SEC).



Note 2

INVENTORY



Inventories are stated at lower of cost or market and consist of the following:



|                |   |        
|--------------- | - | -------
|Raw Materials   | $ | 183,100
|Finished Goods  |   | 155,975
|Total Inventory | $ | 339,075



Note 3

ISSUANCE OF COMMON SHARES AND WARRANTS



During the period from January 1, 2007, through March 31, 2007, no additional stock or warrants were issued.



Note 4

NOTES PAYABLE



The company has borrowed funds for operating purposes from an individual pursuant to a note.  The terms of the note include principal of $50,000 and interest of $3,763.  If the principal and interest was not paid within 60 days of 6/15/05, the additional interest of 10% annually will be due on original amounts.  This note is currently in default.  The Company is working with the individual to make payment arrangements.  The principle outstanding on this loan as of the date of this report was $44,722.34



The Company has borrowed funds for operating purposes from another individual in the amount of $123,000. The loan is unsecured, due on demand, and non-interest bearing.



The Company has borrowed funds for operating purposes from another individual in the amount of $5,000. The loan is unsecured, due on demand, and non-interest bearing.



The Company has borrowed funds for operating purposes from another individual in the amount of $71,000. The loan is unsecured, due on demand, and non-interest bearing.



The Company has borrowed funds for operating purposes from another individual in the amount of $40,500. The loan is unsecured, due on demand, and non-interest bearing.





6





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Note 5

PROPERTY AND EQUIPMENT



Source Direct purchased a manufacturing facility in February 2005 located at 4323 Commerce Circle, Idaho Falls, Idaho.  The property consists of approximately 3,780 square feet of office space, and approximately 10,000 square feet of warehouse and manufacturing space.  In August 2006, this manufacturing facility was sold.  Also in August 2006, the Company signed a new agreement to lease this facility for 60 months.  The lease agreement calls for monthly payments of $8,333.



Note 6

GOING-CONCERN



The Company has accumulated losses since inception totaling $5,337,817 and was still developing operations as of March 31, 2007.  Financing for the Companys activities to date has been provided primarily by the issuance of stock, by advances from Stockholders and by borrowing funds.  The Companys ability to achieve a level of profitable operations and/or additional financing impacts the Companys ability to continue as it is presently organized.  Management plans are to continue the development of its principal operations.  Should management be unsuccessful in its operating activities, the Company may experience material adverse effects.



Note 7

DEVELOPMENT STAGE



The Company has been a development stage company in prior years.  The Company has since determined that it is no longer in the development stage.  The Company has established significant revenues and has developed its primary product line.



Note 8

REVERSE STOCK SPLIT AND STOCK ISSUANCES



On November 16, 2006, the Companys Board of Directors and majority of the Companys shareholders approved a reverse split of its common stock on the basis of 1 share for each 25 shares outstanding.  This stock split is reflected in the current year financial statements presented herein.



During November and December 2006, the Company issued a total of 4,209,196 shares of its common stock on a post-split basis for various services provided to the Company.  These shares were valued at $1,720,714.









7





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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



Forward Looking Statements



This Quarterly Report contains forward-looking statements about the business, financial condition and prospects of Source Direct Holdings, Inc. (we or the Company), that reflect managements assumptions and beliefs based on information currently available.  Additionally, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer, or in various filings made by the Company with the Securities and Exchange Commission. Words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project or projected," or similar expressions are intended to identify "forward-looking statements."  Such statements are qualified in their entirety by reference to and are accompanied by the below discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.



Management is currently unaware of any trends or conditions other than those mentioned in this management's discussion and analysis that could have a material adverse effect on the Company's consolidated financial position, future results of operations, or liquidity. However, investors should also be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue, (ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so, (iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future (vi) a very competitive and rapidly changing operating environment, (vii) changes in business strategy, (viii) market acceptance of our products and, (ix) a failure to successfully market the Companys products.



The risks identified here are not all inclusive. New risk factors emerge from time to time, and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company disclaims any obligation or intention to update any forward-looking statement.



All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934.



COMPANY HISTORY



Source Direct Holdings, Inc., was incorporated under the laws of the state of Nevada on July 21, 1998, under the name Global Tech Capital Corp. (GTCC), and began filing public reports with the filing of a registration statement on Form SB-2 on September 4, 2001.  From July 1998 until October 2003, GTCC had minimal business operations.  GTCC was in the development stage and seeking profitable business opportunity.



On October 14, 2003, GTCC and Source Direct, Inc., an Idaho corporation (SDI), entered into an Agreement and Plan of Merger (the Merger), under which a wholly owned subsidiary of GTCC was merged with and into SDI, with SDI being the surviving entity.  Under the agreement, we acquired 100% of the outstanding shares of SDI, in exchange for 63,030,000 shares of GTCC, making SDI our wholly owned subsidiary.  In connection with this transaction, we changed our name to Source Direct Holdings, Inc.



References in this report to the Company refer to Source Direct Holdings, Inc., and its subsidiary, Source Direct, Inc., unless otherwise stated.





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SUMMARY OF OUR BUSINESS



In connection with the Merger, we acquired the formulas for two cleaning products. These products are Simply Wow® and Stain Pen®. The formulas for these products were developed by Deren Z. Smith, the President of the Company and one of its directors.  Kevin Arave, the Secretary/Treasurer of Source Direct and a director, also assisted in the funding for the development of the formulas.  Any and all rights and interests of these parties in and to the formulas or the trademarks were transferred to the Company for 11,500,000 shares each of SDI. These shares converted into 17,250,000 common shares of the Company as a result of the Merger. These shares were issued on a pre-split basis.



Additionally, the Company has developed new products, including Odor Annihilator® in May 2005 and Tuff Buff ® wash-n-wax in November 2005.



We have applied for the trademarks to all four of our products but have not made application for any patents.   Management believes it would be difficult, if not impossible, to duplicate the formulas for the Companys products. We maintain confidentiality agreements with all parties who have access to the formulas.  Nevertheless, there is no assurance that someone could not duplicate the formulas and directly compete with the company.  The cost of litigating the issue of illegal competition may preclude us from being able to protect the secrecy of the formulas.



Our business is currently organized into three operational divisions: Household products, Automotive products, and Industrial products.



HOUSEHOLD PRODUCTS



Simply Wow®



Organic Simply Wow® is an all-purpose cleaner that safely and effectively cleans any washable surface.  Simply Wow® is developed with nonionic surfactants that contain penetrating and suspending agents that dissolve the toughest grease, protein, dirt, and oil stains.  The product is a water-based, multipurpose, biodegradable, nontoxic degreaser with a pleasant lemon fragrance that effectively replaces flammable or combustible solvent cleaners. It contains no hazardous solvents or acidic-type chemicals, and its formulation safely accomplishes the cleaning that previously required solvent or acid cleaners, which exposed the user and the environment to the inherent hazards of such chemicals. The following are what we believe to be specific advantages of using Simply Wow®:



1.

It is designed with nonionic surfactants and wetting, penetrating, and suspending agents to dissolve the toughest grease, protein, dirt and oil stains.



2.

It replaces most or all cleaners in a persons home and can be used to clean stains on various surfaces, including walls and cars.



3.

It will keep carpets cleaner longer by removing previously uncleanable spots.



4.

It is biodegradable and nontoxic, making this product environmentally safe and friendly.



5.

It removes all types of spots and stains including ink, permanent marker, fingernail polish, scuff marks, crayon, coke, coffee, tea, grease, oil, mildew, pet stains and food stains from materials ranging from clothing to upholstery.



Stain Pen®



Stain Pen® is an on-the-spot stain remover. The convenient size makes it easy to keep at home, in the car, or at the office. This product has a proprietary formula that safely removes food stains, oil paint (wet or dry), makeup, wine, blood, grass stains, grease, coffee and tea stains and copy machine stains with no harmful fumes or large quantities of liquid to spill. Stain Pen® works simply by applying a small amount of stain pen solution to the stain and applying a damp cloth.



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Simply WoW® Odor Annihilator®



We recently introduced the Odor Annihilator® into the market and have applied for a trademark. The Odor Annihilator® is an organic, biodegradable cleaning product designed to eliminate household odors. Odor Annihilator® does more than just remove the odor, it annihilates the source of the odor.



Odors are caused by organisms that send off molecules that your nose detects. Air fresheners try to overpower the odor by covering it up. Fabric refreshers try to remove the odor, but Simply WoW® Odor Annihilator® goes further by removing the source of the odor so that it doesn't return.  Typical odor control consists of perfumes or other masking agents that are applied to hide the odor.  This however does not decrease the odor itself, but adds to it to try and make it les objectionable.  Unfortunately, the odor often becomes overpowering, or only less objectionable than before.  Odor Annihilator® annihilates the source of the odor first by applying a fast-acting neutralizer that binds the odor-causing molecules.  This reduces their volatility and prevents them from reaching your nose.  Then a special select bacteria degrades the odor-causing molecules, destroying them by converting them into microbial cell components, carbon dioxide and water, thereby eliminating the odor at its source.



AUTOMOTIVE PRODUCTS



Simply Wow® Tuff BuffTM



In November 2005, Source Direct launched its newest all-organic, waterless, wash-n-wax product. Tuff BuffTM provides solutions for the discerning driver, professional and hobbyist alike, who demand the highest quality for all their automotive needs -- and it does so at a price point that could mean exceptional volume sales for Source Direct through its rapidly expanding distribution network. Tuff BuffTM contains no acids, V.O.C.s (volatile organic compounds), petroleum distillates, Hexane, or Silicone, eliminating annoying "fish eyes" in the paint and making it safe for even the most prestigious automotive retailers. Tuff BuffTM restores factory shine, safely removes bugs and bird droppings, cleans and protects all finishes including plexiglass and black chrome, is safe for aftermarket window tint, and will not leave white residue in seams. Tuff BuffTM polishes & protects virtually any hard nonporous surface including windshields.



Tuff BuffTM has been designed to improve the appearance of car paint, engine, trim and components. It is intended to restore dull or faded rubber, tires, trim, vinyl, paint, chrome, and other surfaces. Tuff Buff is safe to use on most surfaces and leaves no caking or residue.  Most important, Tuff Buff works to protect and shine virtually any surface and is as organic as an apple.



Simply WoW® Odor Annihilator®



We recently introduced the Odor Annihilator® into the automotive market as well as the household market.



Simply WoW® Auto Care Kit



During the quarter ended December 31, 2006, we introduced our Simply WoW® Auto Care Kit. It is a sampling program that we anticipate will generate brand name recognition and market penetration. It is intended to allow consumers the ability to have cleaning items available in their vehicles. The kit contains 1.25 oz. samples of our cleaning products. We anticipate that the kit can be relabeled for motorcycles, RVs, and private labels for automotive distributorships.



10





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INDUSTRIAL PRODUCTS



Simply WoW® Industrial Cleaner



The Simply WoW® Industrial Cleaner has been designed to remove grease, oil, wax, tar, and dirt, and to meet other industrial cleaning needs. It is a highly concentrated cleaning solution that can be diluted up a 40:1 ratio. The following are what we believe to be specific advantages of using the Wow Industrial Cleaner:





Safe and effective



Biodegradable



Non-abrasive



Non-flammable



Industrial strength



PRODUCT PRODUCTION



We currently produce our products in-house. We also have agreed with other production facilities to help in manufacturing of our products, in the event we could not produce anticipated future needs.  We also believe other production facilities are available if needed to meet any demand for production. We also believe sufficient quantities of raw materials for our products are reasonably available such that production would not be unreasonably delayed, although we do not have any contracts for production of these raw materials. We have not secured any form of financing for significant production of our products. We will attempt to secure funding either from private sources or through a bank loan or some other form of financing arrangement. In June 2006, the Company entered into an agreement to factor a portion of its receivables to enable the quicker receipt of cash for sales on account.  There is no assurance that we will be able to obtain any additional sources of financing, or that if we could obtain it that the financing terms would be favorable to the company.



PRODUCT DISTRIBUTION



Management believes that the most critical phase of our operations is the marketing of our products. We market our products using both current management personnel and outside independent marketing companies.  We currently have several outside marketing arrangements, which we consider significant. These agreements are with the following organizations:





Morgan & Sampson SCA,



Daymon Associates, Inc.



Bridgeworks  Marketing & Sales, Inc. (Canada)

      Koval Marketing Association



The Morgan & Sampson agreement grants to Morgan & Sampson SCA the exclusive marketing and distribution rights to Source Direct's proprietary Stain Pen® Twin Pack to more than 5,000 grocery retailers in the Western United States and Hawaii. In January 2005, through this agreement, we began shipments of our Stain Pen® product to all Safeway® stores and Kmart Super Centers® nationwide.  Additionally, Odor Annihilator® has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful Morgan & Sampson and ATA Retail Services network.



The Daymon Associates broker contract designates Daymon Associates, Inc. as the exclusive sales agent and broker in connection with all sales and/or contracts for merchandise designated to Costco® Warehouses in the following regions:



·

Domestic: Bay Area; Los Angeles Region; Midwest Region; Northeast Region; Northwest   Region; San Diego Region; Southeast Region; Texas Region; Mexico Region; Eastern Canada Region; and the Western Canada Region.



·

International: Japan; Korea; Taiwan; and United Kingdom.





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The Daymon Associates agreement provides that the Company will pay to Daymon a commission on the Company's products sold, shipped, and invoiced to Costco® within the above-defined territory. The Commissions paid will be based on the gross amount of sales generated, defined as the amount of the invoice, less any cash discounts. The Company agreed to pay a 3% commission.



Under the Daymon Associates agreement, Daymon agreed to devote its efforts to the sale of the Company's products during the term of the agreement, which is one year, with automatic one-year renewals unless terminated by either party on 90 days' written notice.  The current term of the Daymon Associates agreement expires April 11, 2007, subject to the automatic renewal. Daymon agreed to provide weekly sales data, by location, as well as analytical reviews of such data. Daymon agreed to devote adequate facilities and personnel to perform the services required in the Agreement.



The Bridgeworks agreement, which we entered into on May 1, 2005, designates Bridgeworks Marketing & Sales, Inc. (Bridgeworks), as our exclusive Canadian agents.  Bridgeworks has over 15 years of industry experience marketing and selling to a variety of retailers, wholesales and industrial accounts in Canada. With a proven track record of generating business by establishing and maintaining positive working relationships, Bridgeworks will continue to expand into other territories and increase customer base where networking will become the foundation in developing Bridgeworks and its clients as industry leaders. As a national company, Bridgeworks offers flexibility and diversification to both customer and client in an always growing and changing industry.



Though our agreement with Bridgeworks, we have received orders and began shipments in March 2006 of the Simply WoW® organic cleaner, Simply WoW® Odor Annihilator®, and the Stain Pen® to Army & Navy Department Stores Ltd., which operates stores in downtown Vancouver, British Columbia; New Westminster, British Columbia; Langley, British Columbia; Calgary, Alberta; and Edmonton's historic Strathcona District, as well as a new 60,000 sq. ft. store in Edmonton's popular Londonderry Mall, both in Alberta.



In May 2007, we entered into a representative agreement with Koval Marketing Association (KMA), a full service sales, service, and marketing company, established in 1982 that is today the largest representative in their field in the Western United States. KMA will be responsible for expanding our sales force to better serve our factories and customers.



In addition to the above agreements, we also utilize internal marketing efforts to advertise and distribute our products.



Our internal marketing staff contracted with Bi-Mart Membership Discount Stores. The Company has begun shipments of our proprietary 3-ounce Stain Pen® to all Bi-Mart Membership Discount Stores throughout the northwest region.



Bi-Mart stores are membership-only stores, which means that customers must join Bi-Mart or be a guest of a member before shopping. Bi-Mart currently has over one million members at more than 60 stores in Washington, Oregon, and Montana, with plans to continue aggressive expansion throughout the greater Northwest. Each store is approximately 30,000 square feet and deals mainly in hard goods in the following departments: photo, house-wares, sporting goods, automotive, hardware, health & beauty, toys, clothing/shoes, beer/food/wine, and a full service pharmacy.



Our internal marketing staff has also expanded our distribution into the Home Shopping Network catalogue, Improvements. Home Shopping Network is a global, multi-channel retailer reaching more than 85 million U.S. households. Management believes this will offer greater distribution opportunities with this mega-retailer, as HSN expands its catalogue portfolio through numerous acquisitions currently under way.



Our Stain Pen® product has also been featured in the popular LTD Commodities Catalog, which is known for shopping the world in order to sell the best merchandise from house wares, gifts, toys and apparel.



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We also have a relationship with ATA Retail Services, Inc. ATA Retail Services is a privately owned, national company with 15 years in operation as a supplier of full-service merchandising programs to over 6,500 stores in 48 states, including the country's three largest supermarket chains, many regional supermarket chains and numerous drug stores. ATA Retail Services is headquartered in the San Francisco Bay area, employing more than 1,000 people.



During the quarter ended June 30, 2006, Source Direct received an initial purchase order for our Stain Pen® product by one of America's larger corporations Bed Bath & Beyond, with over 700 retail outlets that specialize in domestic merchandise. The product was shipped in June 2006.



Sponsorships and Advertising:



Source Direct became a title sponsor on a NASCAR sponsorship agreement with Erik Darnell and Darnell Motor Sports for the 2004 and 2005 NASCAR racing seasons. Erik Darnell was a featured competitor in "Roush Racing: Driver X," a 13-week series debuting on the Discovery Channel.  After 13 weeks of intense competition, competing on two of the toughest racetracks in NASCAR, selected out of 1,700 applicants and winning the approval of ROUSH RACING's toughest judges, Erik Darnell was recognized as the best talent for 2006. In addition, Source Direct sponsored Roush Racing's No. 99 Ford F-150 and NASCAR driver Erik Darnell in the NASCAR Craftsman Truck Series races at the Martinsville Speedway on April 1, 2006, and at the Gateway International Raceway on April 29, 2006.  As a result of these two races, the Company is in negotiations with two major distributors to sell the Simply WoW® products. The Company is one of Erik Darnells primary sponsors.



In April 2007, we announced that Simply WoW® will sponsor Roush Fenway Racing's No. 99 Ford Fusion in the ARCA RE/MAX Series at Kansas Speedway on April 27, 2007, and at Kentucky Speedway on May 12, 2007.



In March 2006, Source Direct became a sponsor for the Simply WoW® Lacey Racers, the only all-female professional race team competing for more than $250,000 in prize money in the National Guard Great Race 2006, the worlds richest, transcontinental vintage car rally. The event began June 24, 2006, in Philadelphia, Pennsylvania; crosses 15 states, with stops in 50 cities; and finished 14 days and 4,200 miles later in San Rafael, California. Through this sponsorship, we anticipate that exposure for Source Direct's Simply WoW® family of organic, biodegradable cleaning products will span the continent, with Simply WoW® product sampling taking place at overnight stops in York and Washington, Pennsylvania; Dublin, Ohio; Indianapolis, Indiana; Saint Louis, and Springfield Missouri; Wichita, Kansas; Pueblo and Durango, Colorado; Page, Arizona; Tonopah, Nevada; Sacramento, Vallejo, and San Rafael, California; and at free, family-focused activities including parades, local car shows, and festivals throughout the route.



In May 2007, we announced that Simply WoW® added one more venue that will further increase brand name awareness by entering the World Series of Off Road Racing. Simply WoW®, is a new entry in Off Road Racing, and Probst Motor sports, having over 190 Career Victories and 16 Class championships, have teamed up for the 2007 season. We will debut the Simply WoW® Off Road Racing team at the inaugural WSORR event in Owatonna, MN, May 19th through September 23, 2007.



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OTHER AGREEMENTS



During the quarter ended March 31, 2006, we entered into agreements with four firms for professional services including corporate governance guidance, legal services, public relations and development of business and marketing support. These agreements provide for the issuance of shares and warrants of our common stock in lieu of cash payments for the services rendered. The agreements are for a period of 2 years.



In August 2006, we entered into a new factoring arrangement with Riviera Finance. The agreement allows the Company to receive financing in advance of the collection of certain accounts receivable that are acceptable to Riviera Finance. The accounts that are financed are pledged as collateral for the loans. The agreement is for six months and is automatically renewable for additional six month terms unless cancelled by either party.



During the quarter ended December 31, 2006, we entered into a contract with Capital Media Partners. Capital Media Partners is a media agency formed for the sole purpose of providing emerging growth companies access to effective marketing techniques and processes developed for Fortune 500 companies, coupled with mass media to build long term value in their enterprises and increase liquidity in their stock.



Primary Customers



For the nine months ended March 31, 2007, a majority of the Companys sales were to three different customers. A majority of these sales were for our Stain Pen® product. We received revenues through sales of our products by three divisions of Albertsons®: the Salt Lake division, the Denver division, and the Vacaville, California division. We believe that we have a good relationship with these divisions. Also, we have received orders from ATA Retail Services and recently we began shipments of our Stain Pen® product to Bed Bath and Beyond® retail outlets. Additionally, we have received purchase orders from additional divisions of Albertsons®.



We continue to develop many different outlets for our unique line of products.  Our Odor Annihilator®, has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful ATA Retail Services network.



With the addition of these new customers and increased sales, we view this as positive steps in making the company profitable. The loss of any of these current customers would have a significant negative impact on sales.



Principal Suppliers



The principal suppliers of the raw materials we use to manufacture our products include Michelman Incorporated, Norman Fox & Co., Chemcentral Inc., and VoPak USA.  We believe that we have good relationships with our suppliers.



COMPETITION



The market for cleaning products is intensely competitive and dominated by a small number of large, well-established and well-financed companies. Many if not all of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than does the Company. In addition, we also face competition from potential new entrants into the market who may develop new cleaning products. We cannot guarantee that the Company will be able to compete successfully against current and future competitors or that competitive pressures will not result in price reductions, reduced operating margins and loss of market share, any one of which could seriously harm our business.  We also cannot guarantee that the life cycle of the products of the Company will be sufficient for us to realize profitability.



Employees



As of the date of this Report, we had seven full time employees. A majority of our marketing and distribution efforts are handled through the distribution agreements noted above. Our production efforts are also mostly outsourced through our manufacturing arrangement.





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DESCRIPTION OF PROPERTY



Source Direct purchased a manufacturing facility in February 2005 located at 4323 Commerce Circle, Idaho Falls, Idaho. The property consists of approximately 3,780 square feet of office space, and approximately 10,000 square feet of warehouse and manufacturing space.  In August 2006, we sold this manufacturing facility.  Also in August of 2006, the Company signed a new agreement to lease this facility for 60 months.  The lease agreement calls for monthly payments of $8,333. The Company anticipates that the facility will be suitable, appropriate, and adequate for its needs for the foreseeable future.



We currently own the following trademarks and web domains:



Trademarks:

Simply Wow®

Stain Pen®

Prompt®

Works On The Spot®

Tuff BuffTM



Web Domains:

·

http://www.simplywow.com

·

http://www.worksonthespot.com

·

http://www.multipurposecleaner.com

·

http://www.stainpen.com

·

http://www.stainstick.com

·

http://www.laundrystain.com

·

http://www.organicsimplywow.com

·

http://www.tuffbuff.com

·

http://www.allpurposecleaner.com



Financial Condition and Changes in Financial Condition



Nine Months ended March 31, 2007 and 2006



Revenues for the nine months ended March 31, 2007, totaled $368,969. These revenues were primarily generated from purchase orders from various retail stores including Albertsons®, ATA Retail Services and the Flying J Travel Plaza chain. We anticipate receiving additional orders from these sources as well as from the other distribution agreements that are in place, but we can give no assurance that such sales will occur.  Our cost of goods sold for these sales totaled $164,878, which resulted in a gross profit margin of $204,091 or 55.3% of sales. Revenues for the prior year nine month period totaled $267,581 with a gross margin of $171,222.



During the nine month period, we sold our manufacturing facility to a third party and entered into a leasing arrangement for the property. We realized a net gain of $175,148 from this sale which is reflected in other income.



Operating expenses for the nine months ended March 31, 2007, totaled $2,264,854. Compensation related expenses were $232,260. We incurred a non-cash charge of $139,875 for the issuance of shares of common stock for board of director services. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $422,600 of which $122,440 were non-cash charges for issuances of common stock for services in lieu of cash. We incurred $72,853 consulting, legal and accounting related expenses as a result of various marketing efforts and expenses related to fulfilling our filing requirements with the SEC. We also incurred $1,200,000 in a non-cash charge for the issuance of common shares to officers of the Company for research and development expenses during the nine month period. The remaining expenses were incurred for general business purposes.





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Operating expenses for the nine months ended March 31, 2006, totaled $749,151. Compensation related expenses were $233,224. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $245,289. We incurred $117,884 in consulting, legal and accounting related expenses as a result of the various marketing agreements we entered into and expenses related to fulfilling our filing requirements with the SEC. The remaining expenses were incurred for general business purposes.



We believe we will continue to incur substantial expenses for the near term as we increase our marketing efforts to introduce our products to the market.



Liquidity and Capital Resources:



Since inception to March 31, 2007, we have funded our operations primarily from the sale of securities and loans. However, as sales have continued to increase, more of the revenues of the sales are used in the operations.



During the period from inception through March 31, 2007, we sold a total of 883,398 shares of our common stock on a post-split basis for total cash proceeds of $1,779,579. In addition, we issued 4,960,796 shares on a post-split basis for various services provided for the Company valued at $3,197,300. We have utilized the proceeds from these stock sales to fund our various marketing and promotion efforts and general business activities.



We have also funded our operations with loans from shareholders and other individuals. As of March 31, 2007, we were indebted to these note holders for a total amount of $239,500. The loans are unsecured, due on demand, and non-interest bearing.



The Company has borrowed funds for operating purposes from an individual pursuant to a note.  The terms of the note include principal of $50,000 and accrued interest. If the principal and interest was not paid within 60 days of June 15, 2005, then additional interest of 10% annually will be due on original amounts. This note is currently in default. The Company is working with the individual to make payment arrangements and has made a $15,000 payment on this note on August 25, 2006. The balance of this loan is $44,722 as of March 31, 2007.



On January 13, 2005, the Company entered into agreements to purchase a new headquarters building. The purchase price for the property was $800,000. Pursuant to the terms of a promissory note, the Company was required to pay $5,882.19 on or before March 3, 2005, and the same amount on or before the third of each month thereafter. The Note bore interest at a rate of 11.25% and matured on January 13, 2006.



On August 22, 2006, the Company sold its new headquarters building for a total sales price of $1,000,000, which resulted in a net profit to the Company of $175,148 net of settlement expenses. In conjunction with the sale, the Company signed a new agreement to lease this facility for 60 months.  The lease agreement calls for monthly payments of $8,333.



In June 2006, we entered into a new factoring arrangement with Riviera Finance. The agreement allows the Company to receive financing in advance of the collection of certain accounts receivable that are acceptable to Riviera Finance. The accounts that are financed are pledged as collateral for the loans. Riviera will withhold a reserve amount of 6% of each invoice submitted which will be reimbursed to the Company upon receipt of all funds due under the invoice. In addition, Riviera will charge a factoring fee based on the total value of invoices submitted and approved for each month. The maximum amount that can be financed is $200,000 per month. The factoring fee is based on the monthly volume of invoices submitted for financing and ranges from 9% for up to the first $10,000 of financed invoices to 3.9% up to $250,000 of financed invoices. The agreement is for six months and is automatically renewable for additional six month terms unless cancelled by either party.





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At March 31, 2007, we had $0 in cash balances and net working capital of $516,396.  Our cash requirements for the next twelve months will depend significantly on the number of purchase orders we receive for our products and our ability to secure financing for these orders.  We have entered into a factoring arrangement as noted above. We anticipate that we will be able to secure either a business loan or other form of financing for any purchase order that exceeds our current ability to fund internally.  However, we have no current agreements or arrangements which would provide such funding other than the factoring agreement.  We have also not negotiated the terms of any other forms of funding and cannot provide any assurance that the terms will be favorable for the Company.  We are also unable to predict the number of orders for our products, or if we receive additional orders, the amount of operating profit such orders would generate.  Therefore, we are unable to predict our future cash requirements until we secure additional purchase orders.



We continue to perform research and development to improve our existing cleaning products and to provide new cleaning products. We anticipate that we will continue to spend funds for research and development during the next twelve months, but we are unable to predict or anticipate the total amount of these future research and development expenses.  In many instances, new products are developed as a result of interest expressed by a potential retail client in similar or ancillary products to the ones initially presented.  This may occur especially in our private label products.  Many retail outlets require a set of related private label cleaning products before ordering any cleaning products.  Such was the case in our automotive cleaning products.  Our wheel cleaning and tire cleaning products were developed as a result of responses from potential clients for our automotive vinyl-cleaning product who required a set of automotive cleaning products rather than the single vinyl-cleaning product.



We believe we will need additional funding. We are assessing the possibilities for financing our business plan and trying to determine what sources of financing we might explore to raise the needed capital. We have no outside sources for funding our business plan at this time. We will need additional capital for any current or future expansion of our operations we might undertake. If we do not obtain funding, we will have to discontinue our current business plan. We do not believe traditional sources of funding such as bank loans would be available for these expenses, and therefore anticipate that if additional funding is required, such funding would be in the form of private lending arrangements or equity investment in the company.



Plan of Operation



The operating subsidiary has embarked on a two-fold growth program, which includes the following strategies and plans:



Our plan of operation includes the implementation of a multi-pronged marketing strategy to distributors, retail stores, and cleaning professionals, and direct to consumers to position the Company to become a major supplier in the U.S. all-purpose cleaning solution market.  Managements business model is to position the Company as an authority in this area, based on (i) its potential as a market innovator and future leader, (ii) careful attention to product quality, (iii) the Companys tested and proven products, (iv) its ethical business practices, and (v) the confidence of a large number of loyal consumers.



We also intend to seek acquisitions or co-branding arrangements with small, under-capitalized suppliers of cleaning products whose products would compliment or extend our product line, and which could be acquired readily to support the corporate objectives. We intend to acquire only companies whose market presence, product mix, and profitability meet certain acquisition criteria, and to incorporate their products into the existing product line or into lines of supporting or related products.



In order to achieve the planned level of growth in both sales and profitability, we anticipate the need for a substantial amount of external capital, either from the sale of securities or incurring of debt, to permit us to execute the next stages of our business plan.  We have no firm commitments or arrangements for this funding and there is no assurance that we will be able to secure the funding necessary to implement the business plan.





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New Accounting Pronouncements



In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS #157, Fair Value Measurements, which replaces and amends various other pronouncements.  This statement establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies to other pronouncements that fair value is the relevant measurement attribute.  This pronouncement is effective for financial statements for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Early adoption is allowed.  Management is in the process of evaluating the effect this pronouncement will have of the financial statements of the Company.



In September 2006, the FASB issued SFAS #158, Employers Accounting for Defined Benefit Pension and Other Post-retirement Plans.  This pronouncement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income.  Management does not expect this pronouncement to have a material effect on the Companys results from operations or financial position because the Company does not have a defined benefit plan.



ITEM 3.  CONROLS AND PROCEDURES



(a) Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management and our board of directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2007. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based upon the evaluation, required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at such date.



(b) Changes in Internal Controls. There was no change in the Companys internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to affect the Companys internal control over financial reporting.





PART II OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS



On December 9, 2005, Source Direct Holdings, Inc. filed a lawsuit in the Third Judicial District Court in Salt Lake County, Utah, Civil No. 050921794, against Integritas, Inc., International Marketing Group, Inc., Corporate Capital, Inc., Jonquil International, Inc., Asset Growth Strategies, Inc., Reyna Enterprises, Inc., OmniCap, Inc., Phillip Flynn and Scott Phillip Flynn.  The Companys complaint alleges that it was fraudulently induced by the defendants to enter into certain marketing, consulting, and distribution contracts.  Based on the fraudulent inducement and the Companys rescission of the contracts, the Company seeks to recover the approximately 8,000,000 shares of Source Direct stock that were issued to the defendants pursuant to the contracts.  The defendants have counterclaimed against Source Direct, alleging that Source Direct was not authorized to place a stop hold order on the shares issued to the defendants, and that that Source Direct is liable for any decline in the market value of the stock that occurred after September 7, 2005.





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The Company filed a motion for a writ of attachment in order to prevent the defendants from transferring the shares.  The district court granted the motion and entered a writ of attachment, to be secured by a bond in the amount of $480,000, which Source Direct filed on December 16, 2005.  Pursuant to the writ of attachment, the defendants tendered into the courts possession 500,000 shares of Source Direct stock on January 24, 2006, and 7,050,000 additional shares of Source Direct stock on February 7, 2006.  The tendered shares of stock will remain in the courts custody until the final disposition of the litigation or until further order of the court.



The Company denies that it is liable to the defendants and intends to defend vigorously against the counterclaim and prosecute its own claims for affirmative relief against the defendants.



Gordon Sage v. Source Direct, Inc., Source Direct Holdings, Inc., and Deren Smith, US. District Court, District of Idaho, Case No. CIV06-82-E-BLW.  On April 13, 2006, we were served with a complaint filed by Gordon Sage against Source Direct, Inc., Source Direct Holdings, Inc., and Deren Smith, alleging claims including breach of contract, misrepresentations, civil conversion, tortious interference, negligence, employment discrimination, and seeking damages of approximately $470,000, plus other unspecified damages and attorneys fees.  We filed an answer and counterclaim, denying the plaintiffs allegations and bringing claims against Mr. Sage, including breach of contract, civil conversion, breach of fiduciary duty, tortious interference, and punitive damages.  The case is currently in the discovery phase.  We deny the plaintiffs allegations and intend to defend vigorously against the claims and to pursue our claims against Mr. Sage.



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



On November 16, 2006, the Companys Board of Directors and a majority of the Companys shareholders approved a reverse split of its common stock on the basis of 1 share for each 25 shares outstanding. This stock split is reflected in the current year financial statements presented herein.



The following share issuances were made on a pre-split basis:



In March 2004, we issued 1,600,000 shares of common stock to Mark E. Miller for gross proceeds of $150,000.  These shares were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(6) and Section 4(2) thereof, and Rule 506 promulgated there under, as a transaction by an issuer not involving any public offering.  Mr. Miller is the owner of Marden Distribution, Inc., an entity with which we have entered into a marketing agreement for our products in certain retail outlets.



In July 2004, we issued 1,500,000 shares of our common stock to NCP Enterprises, for gross proceeds of $150,000.  These shares were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving a public offering.



In August 2004, we issued an aggregate of 5,000,000 shares to six outside consultants in exchange for consulting services provided to the Company.  Additionally, we issued warrants to purchase up to an additional 4,000,000 shares to four of the consultants.  The shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 504 promulgated thereunder, as a transaction by an issuer not involving a public offering.



In August 2004, we issued an aggregate of 1,000,000 shares and warrants to purchase up to an additional 1,000,000 shares of our common stock to two individuals for gross proceeds of $100,000.  These shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving a public offering.



In September 2004, we issued an aggregate of 2,000,000 shares and warrants to purchase up to an additional 2,000,000 shares of our common stock to two individuals for gross proceeds of $200,000.  These shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving a public offering.





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In October 2004, we issued an aggregate of 50,000 shares and warrants to purchase up to an additional 50,000 shares of our common stock to an individual for gross proceeds of $5,000.  These shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving a public offering.



In November 2004, we issued an aggregate of 620,000 shares and warrants to purchase up to an additional 620,000 shares of our common stock to seven individuals for gross proceeds of $62,000.  These shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving a public offering.



In December 2004, we issued an aggregate of 2,380,000 shares and warrants to purchase up to an additional 2,380,000 shares of our common stock to two individuals for gross proceeds of $238,000.  These shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving a public offering.



In January 2005, we issued an aggregate of 4,860,000 shares and warrants to purchase up to an additional 960,000 shares of our common stock to seven individuals for gross proceeds of $30,000, services rendered, and other consideration.  These shares and warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.



In April 2005, we issued to Benper S.A. de C.V., warrants to purchase up to 7,500,000 shares of our common stock, in connection with an agreement pursuant to which Benper would act as our distributor in Mexico and Central America.  The warrants were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(6) and Section 4(2) thereof, and Rule 506 promulgated there under, as a transaction by an issuer not involving any public offering, and pursuant to Regulation S.



As of June 30, 2005, 520,400 warrants had been exercised by a shareholder and shares have been issued.



During the fiscal year ended June 30, 2006, the Company sold a total of 7,256,575 shares of its common stock for total cash proceeds of $418,829. In addition, the Company issued 1,109,600 shares upon the exercise of common stock warrants for total cash proceeds of $138,700.



During the fiscal year ended June 30, 2006, the Company issued a total of 8,090,000 shares of its common stock for various services provided to the Company. These shares were valued at $740,905.



The following share issuances were made on a post-split basis:



During November and December 2006, the Company issued a total of 4,115,196 shares of its common stock for various services provided to the Company. These shares were valued at $1,692,714.  The Company also issued 94,000 shares for $28,000 in cash.



For each of these transactions, the Company relied on an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933 and the regulations promulgated thereunder.



We have utilized the funds received from the stock sales for our various marketing and promotion efforts and general working capital and business activities.



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ITEM 5. OTHER INFORMATION



Both Deren Smith and Kevin Arave, directors and officers of the Company and the Subsidiary, received 11,500,000 shares each for transferring to the Subsidiary the formulas and related rights used by the Subsidiary.  These shares were converted into 17,250,000 shares each of the common stock of the parent upon consummation of the Merger. The transfer of these assets was not transacted at arms length because both parties were the only directors of the Subsidiary at the time of the transaction.  Messrs. Smith and Arave are both founders of the Subsidiary. The above shares were issued on a pre-split basis. On November 16, 2006, the Company issued an additional 1,200,000 shares of its common stock on a post-split basis to each Deren Smith and Kevin Arave for research and development of new products. These services were valued at $1,200,000.



ITEM 6. EXHIBITS



a.  Exhibits



10.1

Representative Agreement with Koval Marketing Associates.



31.1

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)



31.2

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)



32.1

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. (1)



_____________________

(1)  Filed herewith











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Signatures



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |                                                                                      
|------------------- |  | -------------------------------------------------------------------------------------
|                    |  | (Registrant)      Source Direct Holdings, Inc.                                       
|                    |  |                                                                                      
|Date:  May 21, 2007 |  | By: /s/ Deren Z. Smith                                                               
|                    |  | Deren Z. Smith, President (Principal executive officer)                              
|                    |  |                                                                                      
|Date:  May 21, 2007 |  | By: /s/ Kevin Arave                                                                  
|                    |  | Kevin Arave, Treasurer (Principal financial officer and Principal accounting officer)
|                    |  |                                                                                      





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